Discover more from JamPad
The Shortcomings of Arizona’s Startup Funding Ecosystem
Why Arizona is Lagging + How We Can Catch Up
Players in Phoenix like yesPHX have attempted to build an ecosystem that can rival v1 startup hubs like the Bay Area or up-and-coming hubs like Austin and Miami, but nothing has clicked and taken off on a national scale. Angel groups locally in AZ have sprouted up, notably Desert Angels, Canyon Angels, and Venture Devils. Even VC funds that are AZ-centric have popped up, including Arizona Founder Fund, PHX Ventures, and Brookstone VC.
These are just some of the groups in each of the angel and VC buckets in AZ, so shouldn’t the ecosystem be thriving and on par with upcoming hubs like Miami and Austin? It should, but it’s not. Let’s find out why:
The Angel Bucket
With multiple groups in the ecosystem framing themselves as angel investors, what could be missing that’s driving founders out of AZ to fundraise or simply bootstrap? The very definition in AZ of what an angel-stage startup is.
When a startup goes for an angel round in 2022, they usually have a very minimal (if at all) MVP that performs nothing but the core functionality necessary to solve the problem the startup is out to solve. This is traditional when it comes to software, but it can get even trickier when it comes to hardware (due to costs/experimentation needed, IE requiring $). Startups at this stage usually have the founders coding day & night, talking frantically to customers, and trying to ship something that people want. Nearly all are pre-revenue and looking for that first check to provide the necessary fuel to simply keep doing the above, allowing them to see if they can achieve some form or path to product-market fit that can scale.
Well, Arizona’s angel groups are way out of touch with these criteria. Most, if not all of the angel groups listed above, require thousands of dollars in MRR, a fully functional product, customers, scalable CAC channels, and much more. So, with such a high bar, you’d expect these angels check to be in the range of the mid to high hundred-thousands, right? Nope, wrong again. The sweet spot is 25k-100k, the lower end being where the majority lies. That’s not a bad range for angel investors, but that doesn’t correlate with the traction they demand from local startups. If founders with that traction took that $, the dilution is off the charts (in a bad way). Yet, nobody seems to realize or acknowledge this. Thus, this drives startups to either die, raise externally from places like SF, or simply bootstrap (if possible), not allowing for these groups to get in on the ground floor of some wildly lucrative companies. Those same founders then wind up leaving Arizona altogether. Not because they want to, but because they have to!
The VC Bucket
The venture firms listed above really have the same issue; their bar is incredibly high, such as < $1M in ARR, a rapidly growing customer base, etc. What these firms fail to realize is the moment an Arizona startup reaches this point, they aren’t taking their money. They’re taking much higher quality, higher signal capital from a place like SF with a tier 1 VC. And, just like the angel groups, the check size for the traction they demand? Maybe a few million bucks. Maybe. Whereas, in a place like the bay, one can get a check for 8, 10, 20 million, and much more!
The way these firms can prevent such events from occurring is quite simple; lower your standards, and invest at an earlier stage. These firms are requiring traction that’s equivalent to a series A, yet writing seed-sized checks, This, again, ends up diluting founders & the startup to a point that prevents a tier 1 VC firm to lead or participate in a future round.
All this further stagnates the trajectory for the network effects of a successful startup at scale to take place in Arizona. This is exactly the flywheel that made a place known as Silicon Valley.
The Missing Ingredient & Tectonic Shift
Founders think for a minute: what firm or group in our valley can you think of that’s truly angel stage or seed stage? Nobody. A key component to making a place like Silicon Valley in the early days were engineers at bigger companies investing small checks ($1–10k) in syndicates at a high volume. These folks were considered the “high net worth” individuals that make up an angel investor pool. They’d then send their successful deals to the seed investors residing on Sandhill Road; also known as the Silicon Valley Ponzi scheme by Chamath. Call it what you want, but it works.
So, what are those individuals in Arizona? Real estate people. There’s a slow shift that’s starting to occur in Arizona, where these individuals are sitting on increasingly large piles of cash, looking to get into something “sexier” and more lucrative like tech. For instance, Sinatra raised a large portion of our pre-seed from real estate folks last April. Other founders have succeeded at this as well. As long as founders continue to build tech startups locally from 0 at high volume, and some become highly lucrative (which they will), that pool of real estate individuals will start increasingly banding together to invest in the ecosystem on the ground floor.
That shift is coming; 2022 is the year multiple of the valley’s hottest startups (most in JamPad) begin real liftoff, setting the stage for 2023 to be the year of JamPad and the AZ ecosystem at scale (those network effects begin their slow drip).
On that note, founders: let’s stay locked in & building. Go Rams, and go AZ startup ecosystem.